AT&T negotiating to acquire Teleport

AT&T Corp. is in talks to acquire local phone company Teleport Communications in what could be a $10 billion deal, CNBC has learned. However, sources close to the negotiations say a bid, if one is made, could be below Teleport's current stock price.

Despite a huge run-up in Teleport's stock price on expectations of a deal, the two companies have not yet started serious negotiations on price and the talks could end at any time, the sources say. Both parties hope to either have a deal or call off talks before the end of the year.

A spokesman for AT&T declined to comment, as did a spokesman for Teleport.

A deal would be the first major move by AT&T's new CEO C. Michael Armstrong, although AT&T has considered a purchase of Teleport a number of times over the last three years. On each occasion, talks did not progress to a firm offer. But Teleport's local fiber optic network is still seen as the complement AT&T needs as it tries to move into providing local phone service. Teleport is currently operating in virtually all of the country's largest markets.

Last week, at an investment conference, AT&T President John Zeiglis said the company is totally committed to competing in the local market, calling it a mind boggling opportunity.

With its pending purchase of ACC Corp., Teleport will have 194 million shares outstanding. The company, headquartered in Staten Island, N.Y., posted revenues of $344 million for the nine months ended Sept. 30. Teleport's owners include TCI, Comcast and Cox Cable, who together control over 66 percent of the company's shares. Executives from those companies, led by TCI with its 28 percent stake, have decided to try to sell Teleport and hired Merrill Lynch to find offers, leading to the current talks.

Merrill and TCI declined to comment.

It is unclear what price will satisfy Teleport's majority owners, but it may be below the company's current stock price. Sources point out that Teleport has already added $4 billion in market value since May, mostly on expectations it would be taken over. And although analysts believe the company could fetch above $60 per share in any takeout, that price would represent at least 60 times the operating cash flow expected for Teleport, including ACC, in 1998, a level that would set new records in the industry.

Analyst Jack Grubman at Solomon Smith Barney estimates AT&T would need to find $1.5 billion in pre-tax synergies in order to avoid 13 to 15 percent dilution in 1998 and 1999 at any price above $60 per share.

If it does make a deal, AT&T is expected to use its stock to buy Teleport.